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Emerging Markets Defy Washington Woes

Emerging stocks and some currencies ended the week on a sour note as investors fretted over US political turmoil on Friday, but many assets were still in line for solid weekly gains. MSCI’s emerging market index eased 0.4% as Asian stocks tracked a steep overnight selloff on Wall Street.

The losses were caused by doubts that US President Donald Trump can deliver promised tax cuts and stimulus as rumors swirled that chief economic adviser Gary Cohn would resign and business leaders deserted the administration over Trump’s handling of white supremacist violence, Reuters reported.

Confidence was shaken further after a van plowed through crowds in Barcelona on Thursday, killing at least 13 people and injuring more than 100 in what police suspect was one of a planned wave of militant attacks.

However, solid gains at the start of the week meant emerging stocks were on track for a 1.5% weekly gain—the best in a month. China mainland stocks enjoyed some of the steepest gains, with the Shanghai Composite on track for a near 2% rise—its best week since early April. Indexes in Seoul, Johannesburg and Moscow were all poised for weekly rises.

On currency markets, Mexico’s peso, China’s yuan, Russia’s ruble and Turkey’s lira weakened on the day against a softer dollar. Yet South Africa’s rand was in line for sharp weekly gains, adding 1.6% after Moody’s delayed its ratings decision last Friday and a court affirmed the central bank’s mandate on Tuesday.

While the dash for defensive assets has weighed down treasury yields, emerging dollar debt yield spreads have also come in by four basis points from last Friday’s close to 307 points.

“In spite of the recent dovish news-flow, it is too early to count the Fed out for December,” Citi’s Dirk Willer wrote in a note to clients referring to expectations of a rate rise. “Investors may therefore stay long emerging markets rates for longer, while waiting for an upside inflation surprise.”

In other news, data out of China showed home price growth slowed in July, reinforcing expectations that property price growth in the world’s No.2 economy may stagnate over the course of the year.

However, Malaysia reported that the economy grew 5.8% in the second quarter, expanding at a faster clip than expected, thanks to domestic demand and robust exports.